Sousa v London Borough of Waltham Forest Council - recovery of success fees [2011] EWCA Civ 194 www.bailii.org/ew/cases/EWCA/Civ/2011/194.html

Insurers pursuing subrogated claims can enter into conditional fee agreements and recover reasonable success fees in the same way as other litigants. A claimant pursuing a subrogated claim as instructed by his insurer is in the same position as a union member taking advantage of the funding provided by his union under its collective conditional fee agreement (CCFA).

The Court of Appeal rejected various arguments put forward by the defendant council concerning its liability to pay costs following a settlement of the claimant’s claim concerning damage caused to his house by the roots of trees for which the council was responsible. The claimant’s insurers, Virgin Insurance, indemnified the claimant and instructed solicitors to recover the loss from the council under a CCFA with a 100 per cent success fee.  

The indemnity principle

The defendant argued that, although anyone can enter into a CFA, it was not reasonable for the insurers to have done so in this case. The fact that the insured was indemnified in respect of the costs put him in the same position as a claimant who has the benefit of before the event (BTE) insurance. Such a claimant would not be entitled to claim a success fee. Since the claimant had been indemnified by the insurers, the success fee was not justified.

The court rejected this argument. It is settled law that insurers can recover costs when bringing a subrogated claim in the insured’s name with his consent and that the indemnity principle does not enable a defendant to defeat a claim for costs in such circumstances (Thornley v Lang). The insured comes under an independent obligation, never likely to be enforced, to pay the solicitor’s fees. Where, as here, the insurer enters into a CFA or CCFA, applying the same logic the insured is to be taken as instructing the solicitor on the same basis as the insurer instructs them, that is, under the terms of the CFA.

MGN v The United Kingdom

Inevitably the defendant relied on this recent decision of the European Court of Human Rights in which the funding system and the recoverability of success fees from defendants was strongly castigated. The Court of Appeal were urged to take the views of the Strasbourg court into account.

The court rejected any suggestion that the views of the ECtHR expressed in relation to a claim where Article 10 (the right to freedom of expression) was engaged should affect its decision, holding that it was bound by the decision of the House of Lords in the same case which regarded the success fees under Naomi Campbell’s CFAs as reasonably incurred.

The court refused to allow the defendant, at the eleventh hour, to argue that success fees have such a “chilling” effect as to amount to a denial of justice to the paying party and a fetter on the freedom of access to the court in breach of Article 6.

Comment

Tree root cases such as this were given as an example of recoverable success fees inflating the cost of claims at the expense of council tax payers in the Jackson Report. Ward LJ, self-styled old curmudgeon, is clearly a fervent Jackson supporter and feels that in many respects CFAs have operated as a bonanza for insurers and their lawyers, who are favoured by the law as it stands. Fortunately the Court of Appeal did not allow its views about the present costs system to persuade it into making a bad decision on the law, which would have been the case had they held that it was unreasonable for CFAs to be used to pursue subrogated claims.

There is an increasing tension between the once generally accepted view that the insurance position of the parties was not a matter for the courts to take into account, and the modern desire to obtain as much information as possible about the parties and their circumstances. Disclosure fits better with the CPR “cards on the table" approach to litigation – why should the one factor which may be key to a claimant’s view of the merit of pursuing a claim, namely what is the limit of cover and will the costs eat it up anyway, not be known? And concerns as to the appropriate share of court resources to be allocated to a case ought to include allowance for the prospects of an effective recovery. Whilst acknowledging these concerns, Steel J in West London Pipeline and Storage Ltd v Total UK Ltd confirmed that details of insurance are a private matter between an insurer and an insured, production of which would encourage “deep pocket" litigation and would seriously prejudice a defendant. He concluded that there is no jurisdiction under the CPR to make an order for the disclosure of a party’s insurance position and that the decision to the contrary in Harcourt v FEF Griffin (Representatives of Pegasus Gymnastics Club) was wrong.

Similar arguments arose in Fosse Motor Engineers Ltd v Conde Nast & National Magazine Distributors Ltd where the claimant argued unsuccessfully that the fact that a successful defendant’s costs have been incurred by its insurers is a reason to refuse to award pre-judgment interest on costs under CPR 44.3(6)(g). The court held that it is a commercial reality that both parties to litigation may be insured and it would be a very odd state of affairs if the court could not take into account this reality when making an order for interest on costs. Where the case has been funded by insurers, it will almost inevitably be the case that there will be a financial loss incurred by the insurers in paying out costs bills as and when they fall due for payment. They should be compensated for this loss in interest.

Returning to recent attempts to resist the recovery of success fees, a district judge in the Leeds District Registry has upheld such an argument in a case where the claimant's solicitors had given an oral assurance that they would not charge the claimant any fees if the defendant GP practice was unable to meet any costs order against it. This assurance was held to be a term of the CFA and as it was not in writing, the entire CFA was held to be unenforceable. It was also unenforceable because the claimant would have been entitled to legal aid but chose to go to a non-legal aid firm because she knew them. The claimant was unable to recover any costs from the defendant (Law Society Gazette 24 February 2011).